Acts of God and force majeure during Covid-19 in Mexico
Juan Jose Lopez-de-Silanes
Ringe & Correa SC, Mexico City
One of Mexico’s legal system principles upon which agreements and legal relationships are based is pacta sunt servanda. This principle, written in Latin, means that agreements that are made, must be fulfilled exactly as they were agreed upon.
However, such a principle may have certain exceptions, as Mexican legislation states that under certain circumstances, the failure to perform an obligation shall not result in civil liability for the defaulting party when such non-compliance is a result of events that could not have been foreseen or are unavoidable. Such situations are generally referred to as force majeure or acts of God events.
Mexican legislation does not explicitly describe what an act of God or an event of force majeure is, using both terms indistinctly. As such, a judicial criteria was released by Mexican authorities stating that acts of God would refer to events caused by nature and force majeure events would describe scenarios that occur as a result of the behaviours of man and authorities.
In Mexico, as a result of the Covid-19 pandemic, the government declared a health emergency, which was published on 30 March 2020 in the Official Gazette of the Federation. The publication determined the suspension of non-essential activities, authorising only businesses considered as vital to operate, as well as those activities whose suspension may have irreversible effects in the case of their being stopped.
On 14 May 2020, the Ministry of Health issued an agreement establishing the strategy for the reopening of social, educational and economic activities amidst the Covid-19 pandemic, which extended the list of activities considered as essential to include the mining, construction transport and manufacturing sectors, as well as a system of traffic lights by region to assess the epidemiological risk in each state, which will be in effect until the day the health emergency is declared over.
In view of the foregoing, as long as the health emergency brought on by the Covid-19 pandemic continues and makes it impossible for certain contractual obligations to be carried out, the breaching party may be able to have his liability waived due to force majeure or acts of God, if they can demonstrate the causal link between the non-compliance and the declaration of a health emergency.
In order for acts of God or force majeure events to exclude liability of a defaulting party in an agreement, an external, unforeseen and unstoppable event must occur, which directly affects the defaulted contractual obligation by rendering it impossible to perform. It is important to note that the defaulting party must not have accepted liability for such case, or else force majeure and acts of God will not exclude liability for a defaulting party. Furthermore, it must be noted that waiving the liability of a defaulting party will not extinguish the breached obligation, as long as both parties have not mutually agreed to do so.
In such regard, it is advisable to review the clauses on acts of God or force majeure events established in the respective contract. The Mexican Federal Civil Code states that no one is obligated to act in a fortuitous case except when they have contributed to it, when they have expressly accepted its responsibility or when it is imposed by law. Since these clauses can regulate civil liability, parties can agree that the breaching party is not liable for a default, or even establish limits on the amount of liability. However, if the breach occurs due to malice or gross negligence by the breaching party, the agreement may be declared as null or void.
Another principle that must be followed pursuant to Mexican legislation is the theory of unpredictability or rebus sic stantibus. This principle, in contracts of a successive nature or subject to a term, establishes that they can be readjusted or terminated when there are extraordinary circumstances of a general nature which are impossible to foresee at the time of agreeing the relevant obligation, and which make the fulfilment of the obligation more onerous for certain party.
This principle indicates that the obligations of the contracts can be modified, if the circumstances in which the agreement was concluded changed. Therefore, the aim of this contractual principle is that the parties can agree to amend the provisions contained in an agreement, thus achieving a balance in the obligations of the contract, although it may also be the case that no new agreement is met, in this case the termination of the contract can be sought.
In addition to reviewing the relevant force majeure and/or acts of God clauses of the contract, it is always important to review the applicable law in such regard. For example, in some states, such as Mexico City and Nuevo León, in case of force majeure or acts of God events, whenever the tenant is prevented from using the leased property, no rent will be caused while the impediment is there, in addition to the above, if the party is prevented from using the leased property, and in the case it lasts over two months in Mexico City and Nuevo León, and over one month in Jalisco, the termination of the contract may be requested. Likewise, it is established that if the use of the leased property is only partially impeded, a partial reduction of the rent may be requested, unless the contract is terminated. It is important to clarify that the provisions governing these circumstances cannot be waived, so unlike civil liability, they cannot be agreed in the contract.
In these types of circumstances, it is very important to analyse and list the obligations that are in danger of being breached. It is advisable to review the clauses on force majeure and acts of God established in each contract, in addition to reviewing the legislation applicable to the specific case of each circumstance, so that a readjustment in the contract can be agreed with the counterpart, looking for a possible extension, a price reduction or even the termination of the contract.